Company discontinued hedge accounting, any changes in the fair value of the contract will be
recorded in earnings. The fair value of the Company's contract is based on projected future
paper prices. The price of paper is dependent upon supply and demand in the marketplace. If
paper prices vary from those estimated, the Company would be required to record an additional
liability. The current treatment of the contract may result in greater earnings volatility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The Company's earnings are impacted by fluctuating paper prices. In order to partially mitigate
this risk, the Company implemented a price protection program by entering into a collar hedge
contract. This contract covers certain grades of paper used by the Company, among other
grades, to produce its catalogs. There is a floor and ceiling on paper prices within the contract.
If paper prices remain within the range of the contract, there would be no payment to either
party to the contract. If paper prices exceed the established ceiling, the Company is entitled to
be reimbursed by the counterparty for the excess. Conversely, if paper prices fall below the
established floor, the Company must pay the counterparty. The Company did not pay a
premium at the inception of the contract. The contract has an expiration date of August 2005.
The collar hedge contract had been designated as and was effective as a hedge through
November 2001. During the nine months ended November 24, 2001, the ineffectiveness related
to the collar hedge contract was not significant. Enron filed for bankruptcy in the fourth quarter
of fiscal 2002. In view of Enron's financial situation, the Company discontinued hedge
accounting during the fourth quarter. As a result, amounts previously recorded in accumulated
other comprehensive losses under hedge accounting of $1.736 million (net of taxes of $1.064
million) through November 24, 2001 will continue to be reclassified to earnings in the period in
which earnings are affected by the paper costs. Further, any changes in the fair value of the
contract subsequent to November 24, 2001 will be recorded in earnings. The fair value of the
contract at February 23, 2002 was $2.820 million, which is included in other liabilities in the
accompanying balance sheet. Total amounts recorded in earnings for the year ended February
23, 2002 approximated $700,000. The Company is hedging transactions through August 2005. As
of February 23, 2002, the Company estimates derivative losses of approximately $1 million (net
of taxes) reported in accumulated other comprehensive losses will be reclassified to earnings
within the next 12 months. Changes in future paper prices will result in changes in the fair
market value of the contract, thus the Company cannot predict what, if any, financing expenses
under the contract may be incurred in fiscal 2003.
To date, the Company has not been entitled to receive any payments from Enron under the
hedge agreement. Presently, the Company does not know what effect Enron's bankruptcy will
have upon the collar hedge contract. The Company's management and legal counsel are
currently exploring the status of the contract.
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L I L L I A N V E R N O N
